Apple’s Next Big Move

Apple’s Next Big Move

When Steve Jobs returned to Apple (NASDAQ: AAPL) as CEO in 1997 the company was on the verge of collapsing. The firm had lost the edge it previously held over its competitors and was struggling to create new products. Steve Jobs laterbecame the innovator that would carrythe company to incredible success with the creations of the iPod, iPhone, and iPad. Today, Apple is the world’s valuable company with a current market value of $560.4 billon.

On Monday, the company continued to reach new heights as it closed at $601.10 per share, the first time the company had ever reached over $600. Monday’s $15.53 share price increase was due to Apple’s surprising announcement to pay quarterly dividends of $2.65 a share beginning July 1st. On September 30thApple’s board will also repurchase $10 billion of shares. According to The New York Times, this decision will cost the company $45 billion dollars over the next three years.

I believe this move is a sign of Tim Cook’s strength, Apple’s newest CEO. While some may be skeptical to move away from the success Steve Jobs brought the company, I believe it shows investors that Cook is ready to lead Apple down a new path. This speaks of his courage in the company’s innovation and future direction. Steve Jobs opposed dividends because he believed cash should be kept on hand to fund new innovations, acquisitions, or any other purchases. His philosophy probably stemmed from his young entrepreneur’s attitude, one where an individual lives or dies by every dollar he has.

Some analysts were not very impressed with the announcement because they believed the 1.8% dividend was too low in comparison to competitors. Microsoft and Intel each pay higher dividends at 2.5% and 3% respectively. This lower percentage could just be a starting point for Apple as it tests the waters with the new initiative. The company has expressed that it would be willing to re-negotiate its dividend payments as time progresses.

While paying dividends does decrease cash, Apple will actually benefit from the dividends due to new business. Analysts expect that by the end of September 2013 Apple could have more than $180 billion in cash;for comparison, the company held nearly $100 billion in cash at the end of last year. Many analysts have projected Apple’s share price to rise substantially in the future with some estimates as high as $720 and $760 per share.

Apple’s announcement presents a great opportunity to learn and understand why corporations make decisions about dividend payments and stock buybacks.

When companies issue dividends, it makes them appear more valuable to investors and the general public. It makes them look very confident in their management, products, and future growth. Furthermore, when businessesdecide to distribute dividends, they are confident they have the monetary supply to continually do this for extremely long periods of time. It becomes a red flag when a company decreases or discontinues their dividend payments, which is what occurred at Apple when it was on the verge of collapsing in the 1990s.

Apple’s plan to buyback $10 billion of shares is a clear demonstration of economic supply and demand. This move represents Apple’s belief that itsstock is undervalued. Buying back more of its own stock creates a shortage, which will increase the share price of the stocks outstanding. As the share price increases, investors notice this, and then understand the hidden value the company actually brings to the table. Thiswill accordingly increase the demand for the stock. The shortage, added with the increased demand, drive the share price up considerably.

There is always a risk that a buyback will not be initiated fully, which would make the growthin stock price and value short-term; however, when the world’s most valuable company declares it will do this, I tend to believe they will keep to their word.

Understanding the way dividends and stock buybacks work can be useful as you research other companies to invest your money in. Given these principles and analysts’ views, it appears that Apple is making a decision that will appease investors and take the company to new heights.

Disclaimer: I am merely suggesting the stocks mentioned in this article for academic purposes. Buying or selling any of these stocks is at your own risk, and I do not take responsibility for potential losses you may incur as a result of your investments.

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    Hello, my name is Matt Robertson. I love developing new skills, helping others and traveling around the world. I’m a very self-driven, competitive and tenacious individual. I graduated from the University of Virginia in 2014 with a Bachelor of Arts degree, majoring in Economics. I now work as an Analyst within Morgan Stanley’s Institutional Equity Sales & Trading Division in New York City.

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